UK: Construction Industry Scheme: Do You Need To Pay The Tax Man?

Last Updated: 20 September 1999

A new Scheme governing payments to sub-contractors in the construction industry came into force on 1 August 1999. The rules are not entirely new (an evolution rather than a revolution) as the Scheme has operated in various forms since 1972. New turnover tests and penalties may mean, however, that your business needs to deal with payments for construction work very differently from now on.

What is it all about?

The purpose behind the Construction Industry Tax Deduction Scheme was to prevent small labour-only sub-contractors at the bottom of the construction chain being paid without deduction of tax and national insurance contributions and then failing to pay their proper tax and national insurance contributions to the Inland Revenue. The Scheme affects payments from contractors to sub-contractors. Even if you do not think you are a contractor, read on. The scope of the Scheme is very wide.

Where the Scheme applies, payments for the labour cost of construction operations must be paid net of a 23% deduction, unless the recipient holds a valid Sub-contractor's Tax Certificate (a CIS6) or Construction Tax Certificate (a CIS5). When working out this labour cost the contractor must exclude VAT and any Construction Industry Training Board levy but should include travelling expenses (including fuel costs) and subsistence paid to the sub-contractor. The deductible amount must be handed over to the Inland Revenue by the contractor. The paperwork is important - vouchers must be completed and submitted to the Inland Revenue to show Scheme payments made.

What is new?

Key changes include:-

  • the introduction of turnover thresholds for construction expenditure before businesses are able to apply for a Sub-contractor¹s Tax Certificate (CIS6) or a Construction Tax Certificate (CIS5). These are the certificates which are needed in order to get paid without the 23% deduction;
  • a deliberate and marked reduction in the number of certificates in issue, in particular in the number which do not need to be personally presented by the holder whose photograph appears on the certificate; these certificates are Construction Tax Certificates (CIS5) and do not bear a photograph at all. (The CIS5 is the replacement for the 714C but is very much more difficult to obtain.);
  • penalties for any contractor not checking to see that the sub-contractor has at least a valid registration card (a CIS4) before any payment is made; and
  • (some good news!) a significant increase in the threshold for expenditure on construction operations before businesses which are not directly involved in construction fall within the Scheme.

When does the Scheme apply?

The Scheme regulates payments from contractors to sub-contractors under a contract relating to construction operations where the sub-contractor assumes some form of obligation for the carrying out of those operations. The Scheme does not affect payments made to employees.

The definition of contractor is very wide. It includes any person carrying on a business which includes construction operations and to persons carrying on other businesses if their average annual expenditure on construction operations exceeds £1 million over a period of three years (and there are provisions to deal with the situation where people have not carried on business for three years). In appropriate circumstances it may also apply to local authorities, development corporations and housing associations.

A sub-contractor is a body (an individual (but not an employee), a partnership or a company) under a duty to a contractor to carry out construction operations or provide its own labour, or that of others in the carrying out of those operations, or answerable to the contractor for the carrying out of those operations by others.

Construction operations include (as you would expect) normal works of building and demolition but also include repairs, alterations, installation of heating, lighting, air-conditioning, drainage and power supply and, even, painting and decorating and the white-lining of roads! Certain operations are excluded, notably the professional work of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or landscape design.

How it affects you

If you are a contractor or a sub-contractor in the construction industry, then you should already know about the Scheme.

If you are a sub-contractor you probably held a section 714 certificate and have obtained (or at least applied for) a CIS6 or CIS5 (if you are one of the limited band of companies which will qualify for these). If you are within the Scheme and unable to qualify for a certificate you must have a registration card. If you have not yet obtained one of the new forms of certificate (or a registration card) you need to have regard to the transitional concessions described at the end of this note. (Contractors should also be aware of them since they may help avoid potential problems with sub-contractors.)

Where a company satisfies the basic qualifying criteria (see below) for a certificate, a CIS5 can be issued if the company is of a type which the Inland Revenue has decided will qualify automatically (for example, a listed public company or a company with an annual turnover of at least £5 million) or if the company can show a "business case" that operating with a CIS6 (which the Inland Revenue regards as the normal certificate for a company) would cause substantial difficulties; the Inland Revenue has issued specific guidance on what it regards as a "business case".

As mentioned above, if you are purely a consultant in the construction industry, the Scheme does not affect payment of your fees for professional advice. If, however, you offer clients a one-stop service including building work as well as advice, you could be caught by the Scheme even if the building work is carried out by others. In this situation all of your fee will be within the Scheme unless you have separate contracts for the two sorts of work. In addition, you need to know how the Scheme works to be able to advise your clients properly.

If you are a developer you may well spend enough on construction to make you a contractor as described above. Contractors you engage for your projects will almost undoubtedly be caught by the Scheme and you must not pay them at all unless they have produced either a valid CIS4 (registration card) or a valid CIS5 or CIS6s. (In certain limited circumstances a "certifying document" may be used instead of producing a CIS5.) If they produce a CIS4, you can pay them, but net of the Scheme deduction. Contractors with a CIS5 or CIS6 can be paid gross. If you pay them before they have produced whichever of these documents applies, you will be liable to a penalty of up to £3,000 for each payment you make until such time as the appropriate documents are produced.

As a developer, you may yourself need to apply for either a registration card or certificate if you receive funding from a third party. This is because the Scheme can also affect funds and banks who provide finance for construction work, for example under a typical "forward funding" contract. Many institutions have sufficient annual construction expenditure to become contractors and their arrangements with a borrower/ developer will often fall within the Scheme and the borrower/developer will be a sub-contractor. This being the case, payment must not be made at all until a registration card or certificate is produced and payments must be made net of deduction unless a valid CIS5 or CIS6 certificate is produced.

Even if you are an occupier going about your retail, advertising or other business which, on the face of it, has nothing to do with the construction industry, you may be caught by the Scheme. Your organisation may spend enough on construction each year to become a contractor. If so, you will need to make sure that your administrative procedures are able to deal with Scheme payments to your building contractors (who will then be sub-contractors for the purposes of the Scheme). If you are a brewery or department store have you considered how much you spend on fit-out annually? Where construction work is procured locally, you will need to ensure that your local management are aware of the rules, perhaps by including the appropriate procedures in the company handbook. There is some practical relief from the rigours of the Scheme for very small works commissioned by those who are not in the construction trade. Subject to prior approval by your Tax Office contracts for construction operations where the total contract payments (excluding the direct cost of materials) are not more than £1,000 are exempt from the Scheme.

Reverse premiums

Watch out if you are an incoming tenant and a premium is being paid to you by your landlord. Under the agreement for lease you may well agree with your landlord to carry out, or arrange for others to carry out, construction operations in return for the landlord¹s payment. In this case, the landlord may be a contractor (depending upon the nature of its business and the amount of the reverse premium which will be devoted to expenditure on construction operations) and you may become a sub-contractor. You would then need to apply for a registration card to receive the payment at all and would need to apply for a certificate to avoid the payment being subject to deduction at source. You are also likely to be a contractor, in relation to your sub-contractor (the person you engage to actually do the work). If you only hold a registration card, but your sub-contractor presents you with a CIS5 or CIS6, you will have to pay him gross even though the money you receive from the landlord is net of deduction.

How do you get a registration card or a certificate?

An application form to apply for a registration card or a certificate can be obtained from your local Tax Office. There are no qualification thresholds for obtaining a registration card. Qualifying for one of the certificates is much more difficult than previously, due to the introduction of the turnover thresholds. In very broad terms, firms will need to look for construction turnover of £30,000 per annum per partner or director or an overall construction turnover of £200,000 per annum, although, as mentioned above, there are additional requirements which must be satisfied before a CIS5 can be obtained.

As before, to obtain either a CIS5 or CIS6 you will have to show general good behaviour on tax and national insurance issues during the previous three years and that you operate from established premises and with a bank account.

What about my contracts?

If you are a contractor you will need to ensure that you don't become a late payer under the Construction Act or the Late Payment of Commercial Debts (Interest) Act 1998. You must ensure that your contract allows you to delay payment and avoid incurring interest if the sub-contractor has not produced its documents. The JCT have published contract amendments dealing with this.

Transitional provisions

Although less well publicized than the recent queues of holidaymakers waiting for new passports, the backlog of applications for the new certificate is just as significant. In the light of this, the Inland Revenue has been forced to introduce various temporary measures which, in some circumstances, will allow the continued use of 714 certificates to obtain gross payment until 5 November this year. This particular concession requires prior authorisation from the Inland Revenue and you should seek specific advice if you think that you may need to use it. The underlying message from the Inland Revenue remains that you should be complying with the new Scheme from 1 August 1999.

If you would like further information or specific advice, please contact Mark Baldwin.

This note is intended to provide general information about a recent development which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

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